Vladislav Inozemtsev – ”In economic terms, for Russia – 2010 will be a lost year”

According to renowned Russian economist Vladislav Inozemtsev: ”In economic terms, for Russia – 2010 will be a lost year”

Mr. Inozemtsev, please tell us how to predict the new year 2010 for Russia ? Of course, it will be a difficult year (as for most countries). But what does this mean from an economic perspective ?
– I  am not expecting anything optimistic from 2010 – the economic crisis will continue. Perhaps not in such a dramatic form as in the past year, but there will be no essential development of economy – the economic growth will be between 0 up to 1 %. Investments will remain at their previous level or will be insignificant. I think this year will be lost, as I don’t expect any economic reforms from the government that could determine economic growth.

Your are among those who viewed a message from President Medvedev, about the modernization of Russia with skepticism. It is true that there is a certain “chameleonic” liberalism which raises questions. Even if at face value it sounds like  good things. Meanwhile, the President has given further explanation in a long interview on national television. Has it changed anything in your option? What are your main objections still ?
– I have greater doubts concerning plans to modernize the country. In order to speak about modernization, it is first of all necessary to speak about the development of the industry and about an infrastructure which very strongly lags behind. The first problem that it is necessary to carry out – to develop the level of the industry at least to European standards. Such problem should be solved through catching up with modernization. I’m referring to importing technologies, attracting investments, providing a basis for opening foreign manufactures.

Such path following Japan, China, Taiwan, South Korea and the results are seen. Thus, there will be a stimulus to development of the industry. After the industry will start to develop, there should be a transition towards innovative economy – mastering of innovations, existing abroad, development of demand for technologies.

President and his advisers put things differently: they approve, that we should develop through technological breakthrough, but on own way. That is, there is an attempt to skip a natural stage of industrial development. In my opinion, it is impossible. It is useless to invest in the development of Russian technologies today, for two reasons. The first – a level of new Russian technologies will only rise to old European standards anyway. To adapt aboard technologies is a problem that can be solved much more easily. The second – the Russian industry does not create demand for new technologies today. Today the Russian industry is owed to monopoly, a result of merging the industry with authority, is quite satisfied by existing technical basis, therefore the inquiry about technological innovations is absent.

Even if the government will manage to make new technologies, real demand will not be for them, they could not be used in our country. It will be absolutely useless expenditure of money. Therefore, recognizing correctness of the president’s words about the necessity for modernization, nevertheless I understand it as modernization based on the idea to catch up with the level of the European countries. I do not trust that current Russian technological opportunities will allow to carry out industrial jerk and to create something serious. I consider that it is necessary to pay more attention to introducing technologies, than on their creation. The domestic production of technologies and equipment will be interesting in 10-15 years, when the Russian industry will rise and there will be a demand for it.

– I agree with you when you say that there can be no economic reform and modernization without reforming the political class. But is it only a matter of political will ? Does the political class of Moscow have enough resources (in itself) to make this reform ?

– I think, it is a question of political will. If transform nothing, nothing will be the result, hence, it is necessary to start with something. Nevertheless I do not agree with many of our liberals who put in direct dependence the modernization of the country with the level of democracy, calling to total liberalization and dismantling Putin’s system. I am sure that it isn’t an intrinsic condition – many countries were successfully modernized in conditions of authoritative government. Therefore, from an economic point of view, the question is not whether Russia is a democratic country. The question consists in that, how prepared is the elite to discipline itself. In fact, a precise statement of real problems is necessary for modernization. The modern elite cannot cope with this problem because it does not have pragmatic sight in what concerns problems. It is idealistic, it thinks of empty categories. I consider that the plan of modernization should be developed not within the precincts of administration of the president, but in cooperation with the recognized experts who precisely understand how modernization appeared in the majority of developing countries in recent years. If the plan of modernization will be developed entirely within the precincts of the presidential administration, it is necessary for president and government to understand precisely that modernization is the time of serious mobilization of forces, clear statement of problems, the period of rigid responsibility of executors for the result. Unfortunately, the performing discipline is at a catastrophically low level in Russia. The main task of the President – to call bureaucracy to order. It is the question of changing the political elite ? I don’t think so. It is most likely a question of changing a paradigm of dialogue within the elite. It is a question of controlling the existing system. It’s a question about desire to stay on top. The period of dissolution should remain behind and it is necessary to roll up sleeves and go to work.

Certainly, the elite of Kremlin has every conditions that orders of a management were lead up to local parts. But how many in the top management are resolute ? The elite hasn’t been replaced over the last years. But the problem isn’t so much in removability, but rather in responsibility. Our officials, even those at the tops, already have terrified a country by the irresponsibility shown. Will be easy to achieve execution of orders if the president will show his own will and will begin serious rotation of the staff.

– As we all know, Russia has been seriously hit by the crisis, its budget deficit rising to 8% and inflation at 12%. According to officials, these problems will be mitigated by internal and external loans by the state worth 36 billion dollars in 2010. In the next three years it is expected that there will be GDP growth to 4.3% and decreased inflation to 7%. So, things seem to move on a good path. If you were investor, would you invest in Russia  ? Please motivate your choice.

– Unlike the majority of countries, there are very strange investment climates in Russia. If you mean Russian share markets, I shall definitely say “it is not present”. Because the Russian share market is extremely overestimated.

What it represents today? It is the market of several tens of companies. Let’s look at the figures. Before the crisis “Gazprom” had been estimated at $340 billion – approximately 29 % of all Russian gross national product. But if we look at the largest company of in Germany, “Volkswagen” or at the largest company of the USA, “General Electric”, their capitalization in relation to their own gross national product goes from 1.5 up to 3 % accordingly. In Russia, one company makes 30 % (!) of gross national product of the country. The Russia Share market is today a huge bubble: on the one hand, it is strongly overestimated within the size of economy, on the other hand, it is necessary to consider that to receive a control share holding of Gazprom, Rosneft, МВТБ or Rosbank will not be possible to investors. As a  matter of fact these are speculative actions. Categorically I would not advise foreign investors to put in these companies.

As to direct investments, on the contrary, this is a very favourable business. My advice is to invest in average enterprises, over which it is possible to receive full control – retail, trade, bank business, small enterprises of food sector, consumer goods, network companies, etc. There is a huge consumer ability in Russia, therefore, having invested in such enterprises, it is possible in two-three years to receive profit in some dozens of annual interest rates. But I advise to put in those enterprises which are created «from zero». There isn’t a business to be a minority shareholder in a national holding company because owners of such actions are deprived of civil rights in Russia. Besides the enterprises should not have an attitude to strategic branches to not cause the big interest in the central authorities.

– Your and the professor Nikita Krichevsky report about “The new political-economic reality of Russia” has caused a massive reaction in media, in economic and political environments and with the public. However, beyond the scope of these discussions, what did actually happened after his appearance ? What has been done specifically for the separation of state interests from the interests of oligarchic structures ?

– Nothing has changed and there are no signs about. On the contrary – the situation is getting worse. So, the order was signed recently by Prime Minister Vladimir Putin allowing, as a matter of fact, Baikal pulp-and-paper industrial complex to dump their dirty water in the Baikal. Lake Baikal, an important water reserve of the country, even the planet, will be polluted by intent. Despite of protests from the population. It testifies that the state continues to serve the interests of oligarchs. It is not excluded that government officials have personal material interests in these structures of business.

– In your view what should be done to end the controversy that has accompanied and accompanies still the privatization and re-privatization of the Russian economy ? Are there any solutions ?

– About what solutions we can speak in the present context. Nobody asks anything about the privatization. Nobody is interested in it. As to constantly arising problems around the property rights of the enterprises, they are behind frameworks of questions of privatization.

– What do you think is the cause for the tandem Medvedev – Putin being so discussed and controversial ? Many countries have a President and a Prime Minister who, of course, must work together. Abnormal is that does not work. Why should in Russia the things be reversed ?

– I think the media has “contribution” main. It is natural that the President and Prime Minister should work together. And Russia should not be an exception. About constantly updated of the assumptions that are contradictions and a potential conflict between Medvedev and Putin, I don’t see what is based on such speculation. Conflicts can exists between commanders, between various command centers. Currently, the President hasn’t control of his own headquarters, similar that of Prime minister. So, there aren’t  bases for possible conflicts.

– What should Medvedev to change (primarily internally) his image of a puppet of Prime Minister Putin?

– President Medvedev could demonstrate that it is an independent politician. For it is necessary to carry out, in my opinion, two things: first, to initiate creation of new political force, and if not to run it, then at least to declare his support for it. Secondly, the democratic principle of staff selection should be involved. The number protege of prim minister Vladimir Putin should be deduced from a personnel reserve. It would be a first step.

Interview conducted by Gabriela Ionita

Published in Cadran Politic Review, no. 70/January 2010

16 responses to “Vladislav Inozemtsev – ”In economic terms, for Russia – 2010 will be a lost year”

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